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Global Briefing: Dollar Slipping Back Toward 120 Yen

Global asset prices continue to take cues from the U.S.

Global capital markets continue to take their directional cues from the U.S. Yesterday's slide in U.S. bond and equity prices is weighing on global asset prices today. The dollar's recent gains are also being pared back.

Ahead of the reopening of Japanese markets tomorrow, look for interbank dealers to reduce short yen exposure. The yen had been sold off as it became apparent at the end of last week and early this week that the Japanese government was not prepared engage in new spending programs to help boost the economy. The dollar could slip back toward the 120-yen level around where it was before the Golden Week holidays.

The market appears to be looking for excuses to buy the euro

, which has slumped nearly 9% since being introduced at the start of the year. Yesterday

European Central Bank


Wim Duisenberg

indicated that although the current level of the euro was not of concern, further weakness could be met with intervention. In substance his remarks have not really gone beyond what he and other officials have said recently.

Yet other central bank officials have played down the effectiveness of intervention. In addition, without so much as a glimmer of hope that intervention could be backed up by tighter monetary policy, the chances of a successful operation are even more remote. Lastly, much of the euro's weakness this year can be attributed to disappointing growth on the Continent, especially relative to the U.S. To the extent that the euro's weakness is indeed fundamentally inspired, intervention is highly unlikely.

Talk that a negotiated settlement to the war in Yugoslavia is possible after tomorrow's


foreign ministers meeting in Bonn has been cited as a factor helping the euro extend yesterday's gains. Yet there is no hard news suggesting that the Serbs are prepared to capitulate to


demands. It is ironic that during the early days of the war some observers thought the Swiss franc could serve as a safe haven and now talk of a settlement has seen the Swiss franc gain against the euro.

Despite the facile reasons for the euro's advance, the price action is an important indicator of market psychology.

The gains appear corrective in nature. The euro tested initial resistance in the $1.0660-$1.0680 area. Beyond here, it requires a break of the $1.0720 area to trigger the next round of short-covering. Similarly, the dollar has flirted with support against the Swiss franc near the 1.5030-1.5050 area. A break of the 1.50-franc level could lead to an additional 1% pullback in the dollar over the next few sessions.

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The euro's long overdue bounce should not obscure a more impressive development in the foreign exchange market -- the rise of the British sterling. Sterling is near six-week highs against the dollar, after posting its biggest single-day gain yesterday in nearly seven-months. Earlier today the euro briefly fell to new lows against sterling. Sterling has tested the 3-mark level, which has not been seen since last spring.

The ostensible reason for sterling's rise was the growing conviction that monetary policy will remain on hold at the two-day

Bank of England

meeting that begins today. Yet the June and September short sterling futures contracts (futures on three-month sterling deposits, similar to the U.S. eurodollar futures) are little changed over the past week or two and if anything are a touch firmer today.

Ironically, sterling's strength may undermine the budding recovery in the manufacturing sector and encourage the Bank of England to reduce rates.

Sterling's rise since the start of the year has imparted a tightening impulse on British monetary policy. The Bank of England's sterling trade-weighted index has risen almost 7% this year. The general rule of thumb is that a 4% rise of the trade-weighted index is equivalent to about 100-basis-point hike in base rates. Roughly this means that sterling's strength has negated a good part of the Bank of England's easing this year.

For the record, the CBI survey found the fastest growth in U.K. retail sales in April since last June. The rise in April is the second consecutive monthly increase. The CBI does seen a slower pace of growth in May. The CBI called upon the Bank of England to cut rates another quarter-point.

Major European bourses are off a bit more than 1%

, largely in line with the losses seen in the U.S. yesterday. Profit-taking is being reported in financial services and basic materials, like steel and pharmaceuticals. Of note,



indicated that its board has yet to decide on the proposed merger with France's


(RP) - Get RealPage, Inc. Report

. A decision is now expected over the course of the next week.

The Russian stock market has surged almost 14% to an 8 1/2-month high following news that the IMF will provide an additional $4.5 billion dollars in assistance. Since Russian markets were closed on Monday and Tuesday, today presented one of the first chances for domestic investors to respond to the news. The index is now at its best level since the government defaulted on some of its debt obligations in the middle of last August.

European bond markets are little changed after yields rose yesterday near one-month highs. The German 10-year bund yield is up 1 basis point today to 3.96% after rising 6 basis points yesterday in sympathy with the slide in U.S. Treasuries. While the absolute level is not disturbing, the continuing steepening of the German curve is a more ominous sign. The two-to-10-year spread stands near 122 basis points, the highest in nearly 15 months. It stood at 79 basis points three months ago. The 10-30 year spread is just shy of 100 basis points. The steepness of the curve may distort money supply and discourage new investment, and therefore slow the recovery.

Meanwhile, the corrective tone seen yesterday in the Canadian and Australian dollars is continuing today. The U.S. dollar has already hit the initial corrective target near the C$1.4560 level. Scope now exists toward the C$1.4600 area. The Australian dollar is near its lows for the week but should find support near A$0.6550 against the U.S. dollar.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the stocks, currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at